High Gas Prices Cripple Economy
After taking my son on a baseball trip last week to Cincinnati and driving over 1,000 miles and spending $200 in gas, I thought about the impact gas prices have on people’s lives. Listening to parents complain about all the driving gets old after a while, but it sure is real. Whether driving to work or to our kids’ or grandkids’ events, the cost of gasoline is constantly quietly eating away at our bank balances. Father/Son Journey Continues
I have only a 2 mile commute to work and still somehow manage to spend over $300 on gas each month due to driving my kids around to sporting events and other activities. Thousands of people commute to and from Chicago every day, 50 mile round trips in addition to chauffeuring kids around. Just imagine that person’s monthly gas expense.
Prior to working for us, my assistant, Katie, worked in Vernon Hills while living in St. Charles. She had nearly a 100 mile round trip commute every day. This meant she spent about $20 per day for gas or $400 per month just to get to and from work! I’m sure the thousands of commuters to Chicago can relate to these painful costs.
How much does the price of gas impact the average family?
The average person drives 15,000 miles per year. Gas = $4/gallon
2 drivers per family x 15,000 miles per year = 30,000 miles per year for a family
Average car gets 20 miles per gallon: 30,000 miles per year /20 mpg = 1,500 gallons of gas per year per family
The average family with two drivers uses about 1,500 gallons of gas that cost roughly $4 per gallon meaning they pay $6,000 per year for gas!!!
Therefore, every one dollar change in the cost of a gallon of gas costs the average family $1,500/year at the pump!
That’s only part of the pain from higher gas costs.
Any goods or services that have a transportation cost factored into the price is impacted as well. The cost of transporting all goods and services goes up when fuel costs rise. Think of all the items you buy in the grocery store or at shopping malls, and the cost of getting those items to the stores. Or consider the price of a plane ticket, have you seen what it costs to fly these days? For many people it is no longer affordable to fly for vacations. It used to cost about $450 for a ticket to Cancun, now it’s over $800!
Effects on Lower-income Groups and the Economy
When gas prices skyrocket, those who are on a limited budget are affected the most. Out of the Americans earning less than $30,000, 71% say they have cut back on spending due to fuel costs, compared to 43 percent of high earners who make $75,000 or more annually.
It is difficult to avoid purchasing gas unless public transportation or less driving is a viable option. Consumers have the options of spending less on other items, saving less or increasing debt.
“In that sense, the rise in gas prices acts like a tax on a family’s household budget, and they respond by cutting back on other spending. The end result is when we look at gasoline consumption, it doesn’t change very much, but other consumption as we measure it goes down.” – Chris Varvares, senior managing director and co-founder of Macroeconomic Advisers.
Typically, high gas prices equate to an economic slowdown, which makes sense. With consumers spending all of their money on gas, they have less money to spend on other goods or services. In 2011, American consumers purchased 172.2 billion gallons of gas, spending $400 billion, excluding federal and state taxes. If there is a 50 cent increase in the price of gas, this adds about $60 billion to annual consumer bills. That change in spending can ripple through the economy with a multiplier effect.
If you’re paying more at the pump, you are forced to spend less on shoes, dining out and going to the movies.
“The other products that they’re not buying, for instance, ‘Slurpees’ at 7-Eleven, could result in fewer cups being purchased, less ice. Maybe they will cut back on the extra employee in the 4-to-10 shift. It does impact incomes of other firms, and that could impact the employment or incomes of employees.” – Varvares
Ultimately, the effects of high gas prices translate to a reduction in GDP, which is a measure of economic growth.
“If you take the price of (a barrel of) crude and increase it by $10, in a few days it will be reflected in pump prices. That will basically slow down GDP growth by 0.2 percent. But also we’ve looked at the psychological impacts on consumer sentiment, (which) are pretty significant,” says Chris Christopher, senior principal economist at IHS Global Insight, an economic consulting firm.
Average annual gas prices climbed from a low of $1.03 in 1998 all the way to $3.70 in 2014 — an astronomical 259 percent rise in 16 years. By contrast, during this same time period, the Consumer Price Index gained only 40 percent.
High oil prices could upend this trend. A $20 increase in the cost of a barrel of oil cuts 0.4 percentage points off growth in gross domestic product and increases unemployment by 0.1 percent, according to a study by the Energy Information Administration, part of the federal Energy Department.
A February 2011 study from the U.S. Department of Agriculture found that of each dollar Americans spend on food, 7 cents is tied to the cost of energy.
That’s a low estimate. It omits the substantial sums spent on energy in food services, such as at restaurants and workplace cafeterias, which account for 33 percent of all food costs. Nor does it include energy used for processing and packaging, which claim 19 cents of every dollar spent on food.
The bottom line, if I were in charge of jump starting the economy, I would do whatever I could to lower the cost of fuel.